AO Smith-->>> 4 Conservative Growth Stocks Selling At Very Attractive Prices
Forbes
7-14-15
The second company to highlight is well-positioned in an area that has been a bit more challenging to find good opportunities lately, namely industrials. The industrial economy has gone through a number of fits and starts in this recovery and has not demonstrated consistency lately.
Most of our attention has been on domestic revenue-based companies that are more keyed to the U.S. recovery. We are finding opportunities in both the residential and non-residential construction markets, where we are beginning to see further strength. Housing starts are improving, as well as permits and other pertinent metrics.
In this area, A.O. Smith (NYSE: AOS) is the leader in residential and commercial water heating equipment. It holds the top market share in North America, with over 40% on the residential side and north of 50% on the commercial side.
AOS continues to be a direct beneficiary of improvement in residential and non-residential construction. In addition, we are entering a period where the replacement cycle for residential construction is perking up, which is important because about 70% of water heater sales are replacement.
The useful life of water heaters is about 12 years, and given there was a construction bulge between 2002 and 2006, we are entering the sweet spot of the replacement cycle, which should accelerate in the coming years. That increased growth, combined with some of the improvements in new housing starts provides a very good environment in the U.S. for continued improvement.
Forbes: Sounds good.
Broughton: I should mention that 25% of the company’s exposure actually is leveraged into China. This is an area that has seen very strong growth over the last ten years and should continue as such, despite recent blips in the Chinese capital markets. It has been a bit misunderstood. For a time, people have worried about the buildup of real estate across China and what it would mean for a company such as A.O. Smith. But as opposed to the way that water heaters are bought here in the U.S., in China it’s considered more of a consumer appliance often purchased by the homeowner after the home as been purchased. In the last 20 years, A.O. Smith has created one of the most recognizable brands. There are a number of different elements in the U.S. that we are enthused about, which combined with this additional opportunity in China creates a unique opportunity within the area of industrial stocks.
Margard: In keeping with our approach of looking for growth opportunities in all sectors of the market, I’m going to add a couple of stocks that are in two different sectors. Mark spoke of a health care stock and an industrial stock. I’m going to profile an energy company and a consumer discretionary company.
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